"The bank is holding the risk for 10, 20 or 30 years"
Insurance is often the sector thought to be most affected by climate change and weather-driven events, but CoreLogic’s head of consultancy and risk management solutions Pierre Wiart says the mortgage and finance sector is equally impacted – and perhaps even more so.
Wiart says that insurers tend to take a detailed, longer view of their risks and manage them carefully, whereas the mortgage space carries the risk of its portfolios for a much longer time, usually for many decades. He says the issue of climate change is therefore “extremely relevant” to the finance space, particularly for the lenders whose portfolios consist mainly of property.
“When it comes to climate change, we often think that it has to be insurance which is the most affected – and it’s true that it is,” Wiart said.
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“But insurance is able to adapt, review its assessment of risks and try to understand and follow its customers, their needs and how they evolve – so insurance is quite reactive. But for the banking sector, they’re a bit more affected by climate change because they hold the assets for a longer period of time.”
“When you’re talking about a mortgage, the bank is holding the risk for 10, 20 or 30 years,” he explained. “In that respect, climate change is extremely relevant to that business.”
Wiart says that a more careful analysis and understanding of climate risks is well overdue for the finance sector, and that lenders should be taking a longer term view of how their portfolios could be affected. He says a good start is to model a broad risk scenario, and try to understand how your institution would withstand it.
“Now is the right time to really bring in that in-depth knowledge, and to get a view on how the risks could be evolving,” Wiart said.
“Imagine if we’d had more information 20 or 30 years ago - perhaps we could have had better outcomes for the communities which are currently suffering from increased natural hazards like floods and bushfires. It’s certainly time to integrate that view, and to start getting a better understanding of these risks.”
“There are several steps the finance sector can take,” he explained.
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“It can start with a risk scenario to see what it means for a portfolio, particularly one where most of the assets are property. The scenario should identify where those properties are, and what they’re most likely to be affected by.”
“But wherever you are in your journey, if you don’t have an understanding of those risks, then it’s time to take that first step – assess the risk scenario, ask what you learned and what you need to do next,” he added.
“Then as you grow in your understanding of those risks, you might want to become more and more sophisticated in your analysis.”
